With rising NPAs, the banking sector in India is going through a ‘crisis phase’

19 Apr, 2018

Dear all,

To say that the banking sector in India is going through a “crisis phase” would be a bald understatement. Bad loans or “non-performing assets” (NPAs) have risen to unprecedented levels in 2018. According to the statistics that the Union Minister of State for Finance, tabled in the Lok Sabha on 06 April, 2018, NPAs in gross numbers (pun intended) stood at INR 6.89 lakh (more than USD 150 billion) crores at the end of June, 2017. There is speculation in the media that this figure might have reached INR 9 lakh crores by now. The banking sector was saddled with INR 2.67 lakh crores worth of gross NPAs at the end of the fiscal year 2014-15 - almost a year after the National Democratic Alliance (NDA) took over the reins of government. More recent reports indicate that the rate of recovery of written off bad loans has also been extremely poor during the last four years.

Some economists are once again calling for the privatisation of public sector banks (PSBs) to improve their governance and functioning. The recommendations of the PJ Nayak Committee - which reviewed the governance of boards of banks- both public and private in India, submitted to the Reserve Bank of India in May 2014 are being dusted and dished out to the public in support of these demands. This committee identified the application of The Right to Information Act, 2005 (RTI Act) to all PSBs as a major constraint affecting their governance amongst others. No statistics or anecdotal information were furnished in support of this finding.

Ever since the publication of the report of the PJ Nayak Committee, CHRI has been examining the trend of disposal of RTI applications by PSBs based on the Annual Reports of the Central Information Commission (CIC), year after year. Official RTI statistics do not seem to show evidence of any undue burden on them as the average load factor on each branch of a PSB was less than 2 RTI applications per year. This year we present our findings about the manner of disposal of RTI applications by all 26 PSBs and their regulator – the Reserve Bank of India (RBI). Our findings are based on an analysis of the statistical data that the CIC has published in its 2016-17 Annual Report released in March 2018. A gist of our major findings is given below. The full report is accessible on our website.

Major findings

We have grouped our major findings under the following categories:

I. Trends in the receipt of RTI applications;

II. Average load factor of RTI applications in PSBs;

III. Trends in the disposal of RTI applications;

IV. The use of certain exemptions in a questionable manner;

V. Trends in the Banks' use of legitimate exemptions; and

VI. RTI versus NPAs.

I. Trends in the receipt of RTI applications:

25 PSBs received more than 73,000 RTI applications in 2016-17 (see Table: only fresh receipts are included in this figure after deducting the backlog pending from the previous reporting year). This is a dip of almost 4% (3.92%) over the previous year. However Central Bank which receives between 3,00 - 3,500 RTI applications per year did not submit its statistics to the CIC in 2016-17. This lapse may explain the dip in the numbers;

RBI reported receiving more than 13,000 RTI applications in 2016-17 – an increase of more than 14% over the previous year (see Table);

25 PSBs and RBI account for more than half of the RTI applications (57.33%) reported by the Union Ministry of Finance which is their nodal ministry. In 2015-16, PSBs accounted for less than half (48%) of the RTI applications that the Ministry reported. Nevertheless, the overall number of RTI applications reported by the Finance Ministry remains in the range of 1.5 lakhs (151,186) in 2016-17. 15 Banks (including RBI) reported an increase in the number of RTI applications as compared to the previous year (see Table and Graph 1.2). So, in 2016-17, more people sought information from banks as compared to other public authorities under the Finance Ministry.

II. Average load factor of RTI applications in PSBs:

Only 3 PSBs, namely, State Bank of India (1.39), State Bank of Bikaner and Jaipur (1.25) and Punjab National Bank (1.10) averaged more than 1 RTI application per branch in 2016-17 (see Table). All other Banks averaged less than 1 RTI application per branch. So the RTI statistics submitted by PSBs to the CIC do not prove the “constraint theory” identified by the P J Nayak Committee.

III. Trends in the disposal of RTI applications:

While the RTI applications received by 26 Banks (including RBI) in 2016-17 account for 9% of the total number of RTI applications received by all reporting public authorities the Government of India, they account for 33% of the rejections (see Table and Graphs 1.4 and 1.5). In other words, the rate of rejection of RTI applications was much higher as compared to other public authorities under the Government of India. Resistance to transparency seems to have increased during this period, particularly when the banking sector is going through a difficult phase;

The State Bank of Hyderabad rejected a record 71% or 7 out of every 10 RTI applications received in 2016-17 (see Table and Graph 1.3). Oriental Bank of Commerce rejected every 2nd RTI application (50% rejection rate). Corporation Bank's rejection rate was 47.3% while Andhra Bank rejected 45.9% of the RTI applications received in 2016-17. Both Dena Bank and Canara Bank rejected more than 40% of the RTI applications received during this period. 6 other PSBs rejected more than one third of the RTI applications they received in 2016-17 (see Table and Graph 1.3);

Punjab National Bank which has been in the news recently because of the more than USD 1.8 billion- Letters of Undertaking (LoU) fraud allegedly committed in collusion with certain business houses, rejected almost 3 of every 10 RTI applications received in 2016-17 (see Table and Graph 1.3);

IV. The questionable manner of rejecting RTI applications by Banks:

Once again, a large number of PSBs and RBI rejected more RTI applications under “Others” category instead of the legally permissible exemptions to disclosure provided under Sections 8, 9 11 and 24 of the RTI Act. As to what criteria covers “Others” category, remains a mystery (see Pie Charts 1.10 and 1.11). While PSBs rejected 6,625 RTI applications under “Others” category, only 6,616 RTI applications were rejected under Section 8(1)(j)
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information:
Provided that the information which cannot be denied to the Parliament or a State Legislature shall not be denied to any person.
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information:
Provided that the information which cannot be denied to the Parliament or a State Legislature shall not be denied to any person.
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information:
Provided that the information which cannot be denied to the Parliament or a State Legislature shall not be denied to any person.
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information:
Provided that the information which cannot be denied to the Parliament or a State Legislature shall not be denied to any person.
relating to personal information and the protection available for privacy- the most frequently invoked of legally permissible exemptions. RBI also rejected more than half (57%) of the RTI applications it received in 2016-17 under “Others” category (see Graph 1.14).

3 PSBs, namely, Syndicate Bank (7) and Allahabad Bank and Punjab and Sind Bank (5 each) rejected RTI applications under Section 24 of the RTI Act (See Graph 1.15). Section 24 exempts notified intelligence and security organisations from the ordinary obligations of transparency applicable to other public authorities. None of the PSBs are exempt under Section 24 of the RTI Act, so the bar on disclosure will not apply to them;

All 25 PSBs and RBI invoked Section 8(1)(e)
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
of the RTI Act to reject between 6 to more than 900 RTI applications (see Graph 1.27 below). State Bank of India invoked Section 8(1)(e)
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
to reject 902 RTI applications – almost three times more than Syndicate Bank and Canara Bank (both of which rejected more than 380 RTI applications each). State Bank of Mysore (13), Dena Bank (12) and RBI (6) used Section 8(1)(e)
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
the least number of times to reject RTI applications (see Graph 1.27). Section 8(1)(e)
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen, information available to a person in his fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information;
of the RTI Act exempts information that is available to a person in his fiduciary relationship. Fiduciary relationships are trust-based relationships such as those between a doctor and a patient, a lawyer and a client, parents and their children, managers of orphanages and the wards living there. In its Master Circular of July 2014, RBI has advised Banks that their obligation to maintain secrecy of customer-related information arises out of a contractual relationship with the customer. So what kinds of information are being denied by PSBs by treating them as information available in a “fiduciary relationship” with the Banks needs further examination;

10 PSBs invoked the Cabinet-related exemption of the RTI Act [Section 8(1)(i)] to reject 223 RTI applications in 2016-17 (see Graph 1.21). Interestingly, 2/3rds of these RTI applications were rejected by only 2 PSBs, namely, State Bank of India and Corporation Bank. RBI did not invoke this exemption even once during this period (see Graph 1.21 and Pie Chart 1.11).

In 11 PSBs during the year 2016-17 both the number of RTI applications and the volume of Net NPAs increased (see Graph 1.35). These are: Andhra Bank (3.67% : 71.56%), Bank of Maharashtra (3.99% : 62.29%), Canara Bank (36.56% : 3.92%), Corporation Bank (34.93% : 27.64%), Dena Bank (2.19% : 47.88%), IDBI Bank Ltd. (1.63% : 72.13%), Indian Bank (7.65% : 3.45%) Indian Overseas Bank (5.71% : 2.79%), State Bank of Bikaner and Jaipur (3.14% : 240.60%), Syndicate Bank (17.94% : 15.49%) and United Bank of India (608.89% : 7.87%). However, it is difficult to make out any positive correlation in the absence of clues about the nature of information sought. So this could only be a fictive correlation thrown up by the juxtaposition of two sets of statistics;

Only 2 PSBs, namely, Punjab National Bank(-5.70% : -7.68%), Bank of Baroda (-5.20% : -6.83%) reported a downward trend in the receipt of RTI applications and fall in the size of Net NPAs (see Graph 1.35);

Conclusion

The CIC must urgently launch a third party audit of Banks receiving the most number of RTI applications as well as those reporting a very high proportion of rejections in order to make an assessment of the manner in which Banks are disposing RTI applications. This exercise can be undertaken in collaboration with representatives from civil society and academia who have deep knowledge of the RTI case law and a thorough understanding of the banking sector. In the matter of Reserve Bank of India vs Jayantilal N Mistry and related cases the Hon’ble Supreme Court of India had directed the Reserve Bank of India to disclose information about NPAs to RTI applicants. Whether the directives of the Apex Court are being complied with or not can be ascertained only by examining the RTI applications and the responses of each Bank. So a third party audit under the aegis of the CIC is the need of the hour.